Australia / Israel Review

Israel’s summer of social discontent

Amotz Asa-El

It seemed like a politician’s nightmare: hundreds of thousands of people, often young and educated, swarming into the streets across the country, week after week, demanding a fundamental overhaul of domestic policies.

When one August night the demonstrators totalled more than 300,000 people, it became clear that what began with a few thousand tent-pitchers camping out in downtown Tel Aviv had swelled into a grassroots movement whose numbers, backgrounds, drive, and main slogan, “the people want social justice,” could potentially shake Israel’s entire political system.

The occasional analogies proposed by foreign journalists to other scenes of social upheaval – from Cairo’s Tahrir Square last winter to Britain’s urban looting this summer – are unfounded. Israel’s social protest, unlike Egypt’s, was not about freedom, and unlike Britain’s, it has been peaceful and lawful, and was dominated by the middle class rather than the underclass. In fact, Israel’s social protesters, though making sweeping demands like “free education from infancy to university,” are seen as driven mainly by a bourgeois quest to earn more and spend less.

The protesters’ agenda, initially limited to the cost of housing, gradually expanded to issues like salaries for doctors and social workers. Having produced a federated leadership comprising student leaders and social activists, the demonstrators fended off all the bear hugs that assorted politicians, from Opposition Leader Tzipi Livni of the Kadima faction to Labor’s main social issues spokesperson, former Chairman Amir Peretz, had in store for them. The two served in assorted cabinets last decade, reasoned the activists, and as such were part of the problem rather than the solution.

While this attitude came as somewhat of a relief to Prime Minister Binyamin Netanyahu, he remains identified more than anyone else with Israel’s economic policies, and thus is still the protesters’ main addressee, and target. To them, Israel’s abandonment since 1985 of its founders’ welfare state, and, subsequently, Netanyahu’s slashing of social spending as Finance Minister in 2003, should now be at least partly reversed.

The upheaval caught Netanyahu off guard, changing overnight the focus of a political summer previously dominated by preparations for a diplomatic autumn during which the Palestinian Authority plans to formally demand UN recognition of a Palestinian state. Having understood the agenda had been changed, at least temporarily, Netanyahu initially did what the Opposition did: hug the protesters. “These are good people with a fair cause,” he said, recognising that the demonstrators were mainly youngsters who served in the army, and were raised in households that pay taxes, obey the law, and generally embody what he sees as his most natural potential voters.

Several days later Netanyahu pulled another arrow from his quiver, as he promised to provide housing solutions for students. However, he failed to attach to the promise a budget, a schedule, or even just a general blueprint – all of which produced a negative response both in the media and among the demonstrators. To them, it seemed like a shot from the hip aimed mainly at driving a wedge between the students and the rest of the demonstrators. Whatever the strategy behind that overture, it certainly failed to end the street protests, which several days later reached Eilat, Israel’s southern-most town.

Netanyahu therefore produced a more substantial move, appointing a 22-person expert committee headed by an impartial and respected economist, Harvard-trained Manuel Trajtenberg of Tel Aviv University. Trajtenberg lost no time in beginning a dialogue with the demonstrators. “Israel will soon change course, and dramatically so,” said some of the demonstrators, raising even higher the already great expectations for an era of expanded spending, reduced taxation on the middle classes and increased taxation on the wealthy.

Yet the Government’s room to manoeuvre is probably much narrower than the rallies’ participants are prepared to accept. Israel’s macro-economic performance in recent years has been impressive by any yardstick, but even more so considering what has been happening elsewhere in the developed world. After having largely avoided the global meltdown which followed the Wall Street crash of 2008, Israel’s fiscal responsibility looks even better today, with the kind of debt crises now plaguing southern Europe, the UK and the US nowhere in sight. This is because a succession of Israeli governments stuck to rigid debt-to-GDP ratios and kept very low budget deficits, frequently ending monthly activities with surpluses.

Moreover, whereas an economy like Spain’s is clouded by a massive unemployment crisis that reaches 20 percent overall, and double that among the younger workforce, Israel’s jobless rate has been declining steadily in recent years, recently sinking to under six percent, which to economists means that the workforce is nearly fully employed.

In short, the Israeli economy has largely defied global trends, a phenomenon that happened several times previously, beginning with the pre-statehood Great Depression, when the Jewish community of Palestine thrived, thanks to an unexpected immigration from Germany. Today there is no depression, but Israel is again bucking the global trend where a common denominator in all the assorted economic flashpoints has been fiscal irresponsibility. Britain and the US are not in the situation of Greece or Portugal, but the British social unrest has been largely interpreted in the light of sharp budget cuts that followed swelling deficits, and the American debt-rating crisis has been attributed to an expensive healthcare reform that followed unexpected military spending and reduced taxation.

None of this happened in Israel, where fiscal responsibility has become in recent years a moral value, as its supporters portray it, a cult, as its opponents see it, and a norm, as all observers describe it.

Today any Israeli government would be loath to emulate other countries’ fiscal delinquency by squandering the economic accomplishments of recent years. This is even more so with a government led by the outspoken economic conservative Netanyahu. Nonetheless, Netanyahu must demonstrate to the protesters that he has done more than throw them a tactical bone, as he did with his early promise to authorise new student housing schemes.

It is likely that the Trajtenberg Committee will emerge with proposals for strategic change, which Netanyahu will be in no political position to reject. The way to balance these constraints, from Netanyahu’s viewpoint, will be to change priorities within the budget without breaching the budget itself.

This can be accomplished in several ways. First, on the taxation front, by easing the middle class’ burden while increasing that on the business community. Netanyahu’s original plan to gradually reduce corporate taxes to 18%, which would have been the world’s lowest, is now widely expected to be abandoned. While he is expected to ignore demands to hike capital-gains taxes, analysts believe Netanyahu will heed widespread calls to restore state-funded public housing schemes, and to re-regulate housing so that builders of expensive apartment buildings will be required to include in them smaller and cheaper dwellings. In addition, the government is likely to find other ways to encourage rental housing construction.

Also, Netanyahu is likely to slash the indirect taxes that leave middle-income Israelis with less available income than their equivalents in most other developed economies. This may mean reducing automotive sales taxes that make a Fiat hatchback in Israel cost about twice its price in Europe, and it will certainly mean reducing the Value Added Tax, currently 15.5%, and possibly the National Insurance payments that slice at least a tenth off of middle class salaries, mostly at the expense of the employee.

The health insurance tax, which adds up to an additional five percent off most salaries, is not expected to be touched, but even so, the way Netanyahu and his Treasurer Yuval Steinitz see it, the prospective loss of so much internal revenue will have to be offset, or Israel will start sliding down the slippery slope to deep debt and high unemployment. Ultimately, this points at defence spending, which gobbles some 15% of the budget.

Politically, Netanyahu can probably afford large cuts there, because Defence Minister Ehud Barak, having left the Labor party with several loyalists, is in no position to threaten to leave the coalition. However, such license is only political, while military challenges may make significant cuts either unwise or impossible. If September’s diplomatic dynamics ultimately produce renewed Palestinian violence, Barak will be in a position to resist the kind of cuts required to square Netanyahu’s political imperatives.

Added up, all this means that Netanyahu is likely to emerge during the fall with a blueprint for a new economic strategy, while at the same time waiting to see how things transpire on the military and diplomatic fronts. Likely, he will stress to the demonstrators the depth of the European and American debt and employment crises, and try to convince them that heeding their demands hastily might ultimately land the Israeli economy somewhere between Greece and the US.

One policy issue, however, is likely to be addressed relatively fast: competition. Retail prices in Israel are often higher than they are in other developed economies because markets are dominated by a handful of manufacturers and retail chains. For instance, housing prices are placed under pressure not only by a land shortage, which is a regulatory problem, but also by the entire industry relying on a single cement supplier.

Similarly, the food industry is dominated by three conglomerates, and when foreign companies entered the market in recent years it wasn’t as competitors, but as partners of the existing suppliers. A plethora of other industries, from banking to cell phones to bookstores, are dominated by a handful of players whose competition, at the end of the day, does not result in healthy price wars.

Netanyahu says he will change this, by easing foreign competitors’ entry into Israel markets. This is indeed one area where his economic conservatism and the demonstrators’ mixture of populism and neo-socialism can actually be reconciled. In any event, Netanyahu’s willingness to fight Israel’s monopolies and cartels is likely to decide his personal political balance in the aftermath of the current social upheaval. After all, the arrival in Israel of, say, a Japanese cement producer, does not depend on Israeli-Palestinian relations nor does it involve budget cuts or increased government borrowing.

It just takes the kind of enthusiasm for change that Israel’s new social demonstrators have displayed in the summer of 2011.